Terraform Labs Pte. and its co-founder, Do Kwon, have been found guilty of fraud in a lawsuit brought by the US government, stemming from the collapse of the firm in 2022. This collapse resulted in the loss of $40 billion in investor assets and sent shockwaves through the cryptocurrency world.
After a two-week trial in New York, the jury concluded on Friday that Do Kwon and Terraform had misled investors. This verdict represents a significant victory for the US Securities and Exchange Commission (SEC) in its efforts to tighten control over the cryptocurrency industry.
This verdict may also foreshadow impending criminal cases against Kwon in both the US and South Korea, though the burden of proof in criminal cases is higher.
Do Kwon, who holds a 92% stake in Terraform, was arrested in Montenegro a year ago and convicted of attempting to travel with a fake passport. Authorities are now deliberating whether to extradite him to the US or his home country of South Korea, as he faces criminal fraud charges in both nations.
With the Balkan nation’s Supreme Court overturning previous decisions, including those favoring extradition to Seoul, there’s a possibility that he may stand trial in New York.
During closing arguments, Laura Meehan, the SEC attorney, emphasized that the platform’s purported success was “built on lies.” She asserted that failing to disclose shortcomings amounted to fraud, stating, “If you take a big swing and miss, it’s important to be transparent about your failure. That is fraud.”
In contrast, Louis Pellegrino, an attorney for Terraform, argued to the jury that the SEC’s case relied on statements taken out of context. He maintained that Terraform and Kwon had been transparent about their products and their operations, even in the face of failure. Pellegrino stated, “Terraform is still out there, trying to rebuild and compensate purchasers.”
Do Kwon, who was arrested in Montenegro in March 2023, did not attend the trial, which commenced on March 25. Both the US and South Korea have sought his extradition on criminal charges.
Montenegro’s highest court is currently assessing the competing extradition requests. While Kwon’s attorneys prefer extradition to South Korea for a potentially lighter sentence, Montenegro’s government is inclined to approve extradition to the US, according to Bloomberg.
Do Kwon is known for designing the cryptocurrencies TerraUSD and Luna, the latter being a more traditional token with fluctuating value closely tied to TerraUSD.
The SEC estimates that investors lost over $40 billion on the two tokens combined when the TerraUSD peg to the dollar could not be maintained in May 2022. This collapse also had ripple effects, affecting the value of other cryptocurrencies, including bitcoin, and causing turmoil in the crypto market, leading to several companies filing for bankruptcy in 2022.
Terraform, the company, filed for bankruptcy protection in January.
According to the SEC, Do Kwon and Terraform orchestrated a scheme to artificially inflate the price of TerraUSD by having a third party purchase significant amounts of it when the stable coin deviated from its peg in May 2021. The regulator alleges that Kwon falsely attributed the subsequent recovery to the reliability of TerraUSD’s algorithms.
